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Microeconomics

By Glenn P. Hubbard, Anthony P. O'Brien

Published by Prentice Hall

Published Date: Aug 3, 2005

Table of Contents

Preface iv

Acknowledgments xvii

 

Part 1: Introduction

CHAPTER 1: Economics: Foundations and Models 2

WHAT HAPPENS WHEN U.S. FIRMS MOVE TO CHINA? 2

Building a Foundation: Economics and Individual Decisions 5

People Are Rational 5

People Respond to Economic Incentives 5

Optimal Decisions Are Made at the Margin 5

Solved Problem 1-1: Apple Computer Makes a Decision at the Margin 6

The Economic Problem That Every Society Must Solve 7

What Goods and Services Will Be Produced? 7

How Will the Goods and Services Be Produced? 7

Who Will Receive the Goods and Services Produced? 7

Centrally Planned Economies versus Market Economies 8

The Modern “Mixed” Economy 8

Efficiency and Equity 9

Economic Models 10

The Role of Assumptions in Economic Models 10

Forming and Testing Hypotheses in Economic Models 10

Making the Connection 1-1: When Economists Disagree:

A Debate over Outsourcing 11

Normative and Positive Analysis 12

Microeconomics and Macroeconomics 13

“Don’t Let This Happen To You!” Don’t Confuse Positive Analysis with Normative Analysis 13

A Preview of Important Economic Terms 14

Conclusion 15

AN INSIDE LOOK: How Does Economic Growth in China Affect Other Countries? 16

*Summary 18

*Key Terms 18

*Review Questions 19

*Problems and Applications 19

*End-of-chapter resource materials repeat in all chapters.

CHAPTER 1 APPENDIX: Using Graphs and Formulas 21

Graphs of One Variable 22

Graphs of Two Variables 23

Slopes of Lines 23

Taking Into Account More Than Two Variables on a Graph 24

Positive and Negative Relationships 25

Slopes of Nonlinear Curves 25

Formulas 28

Formula for a Percentage Change 28

Formulas for the Areas of a Rectangle and a Triangle 28

Summary of Using Formulas 29

Problems and Applications 29

 

CHAPTER 2: Trade-offs, Comparative Advantage, and the Market System 32

MANAGERS MAKING CHOICES AT BMW 32

Production Possibilities Frontiers and Real-World

Trade-offs 34

Graphing the Production Possibilities Frontier 34

Solved Problem 2-1: Drawing a Production Possibilities Frontier for Rosie’s Boston Bakery 36

Making the Connection 2-1: Trade-offs and Tsunami Relief 38

Increasing Marginal Opportunity Costs 38

Economic Growth 39

Trade 40

Specialization and Gains from Trade 40

Absolute Advantage versus Comparative Advantage 42

“Don’t Let This Happen To You!” Don’t Confuse Absolute Advantage and Comparative Advantage 44

Comparative Advantage and the Gains from Trade 44

Solved Problem 2-2: Comparative Advantage and the Gains from Trade 44

The Market System 46

The Circular Flow of Income 46

The Gains from Free Markets 48

The Market Mechanism 48

Making the Connection 2-2: Story of the Market System in Action: “I, Pencil” 49

The Role of the Entrepreneur 50

The Legal Basis of a Successful Market System 50

Making the Connection 2-3: Property Rights in Cyberspace: Napster, Kazaa, and iTunes 51

Conclusion 53

AN INSIDE LOOK: Choosing the Production Mix at BMW 54

 

CHAPTER 3: Where Prices Come From: The Interaction of Demand and Supply 62

HOW HEWLETT-PACKARD MANAGES THE DEMAND FOR PRINTERS 62

The Demand Side of the Market 64

The Demand of an Individual Buyer 64

Demand Schedules and Demand Curves 64

Individual Demand and Market Demand 65

The Law of Demand 66

What Explains the Law of Demand? 66

Holding Everything Else Constant: The Ceteris Paribus Condition 67

Variables That Shift Market Demand 68

Making the Connection 3-1: Why Supermarkets Need to Understand Substitutes and Complements 69

Making the Connection 3-2: Companies Respond to a Growing Hispanic Population 70

A Change in Demand versus a Change in Quantity Demanded 72

Making the Connection 3-3: Estimating the Demand for Printers at Hewlett-Packard 72

The Supply Side of the Market 73

Supply Schedules and Supply Curves 73

Individual Supply and Market Supply 74

The Law of Supply 74

Variables That Shift Supply 75

A Change in Supply versus a Change in Quantity Supplied 76

Market Equilibrium: Putting Demand and Supply Together 77

How Markets Eliminate Surpluses and Shortages 78

Demand and Supply Both Count 79

Solved Problem 3-1: Demand and Supply Both Count: A Tale of Two Letters 80

The Effect of Demand and Supply Shifts on Equilibrium 81

The Effect of Shifts in Supply on Equilibrium 81

Making the Connection 3-4: The Falling Price of Large Flat-Screen Televisions 82

The Effect of Shifts in Demand on Equilibrium 83

The Effect of Shifts in Demand and Supply over Time 84

Solved Problem 3-2: High Demand and Low Prices in the Lobster Market? 85

Shifts in a Curve versus Movements along a Curve 86

“Don’t Let This Happen To You!” Remember: A Change in a Good’s Price Does Not Cause the Demand orSupply Curve to Shift. 87

Conclusion 87

AN INSIDE LOOK: Hewlett-Packard Cuts PC Prices to Sell More Printers 88

 

CHAPTER 4: Economic Efficiency, Government Price Setting, and Taxes 96

SHOULD THE GOVERNMENT CONTROL APARTMENT RENTS? 96

Consumer Surplus and Producer Surplus 98

Consumer Surplus 99

Making the Connection 4-1: The Consumer Surplus from Satellite Television 100

Producer Surplus 101

What Consumer Surplus and Producer Surplus Measure 101

The Efficiency of Competitive Markets 102

Marginal Benefit Equals Marginal Cost in Competitive Equilibrium 102

Economic Surplus 103

Deadweight Loss 103

Economic Surplus and Economic Efficiency 104

Government Intervention in the Market: Price Floors and Price Ceilings 104

Price Floors: The Example of Agricultural Markets 105

Making the Connection 4-2: Price Floors in Labor Markets:

The Minimum Wage 106

Price Ceilings: The Example of Rent Controls 107

“Don’t Let This Happen To You!” Don’t Confuse “Scarcity” with a “Shortage” 108

Black Markets 109

Solved Problem 4-1: What’s the Economic Effect of a “Black Market” for Apartments? 109

Making the Connection 4-3: Does Holiday Gift Giving Have a Deadweight Loss? 110

The Results of Government Intervention: Winners, Losers, and Inefficiency 111

Positive and Normative Analysis of Price Ceilings and Price Floors 111

The Economic Impact of Taxes 112

The Effect of Taxes on Economic Efficiency 112

Tax Incidence: Who Actually Pays a Tax? 112

Solved Problem 4-2: When Do Consumers Pay

All of a Sales Tax Increase? 114

Making the Connection 4-4: Is the Burden of the Social Security Tax Really Shared Equally between Workers and Firms? 116

Conclusion 117

AN INSIDE LOOK: Dealing with Rent Control 118

CHAPTER 4 APPENDIX: Quantitative Demand and Supply Analysis 125

Demand and Supply Equations 125

Calculating Consumer Surplus and Producer Surplus 126

Review Questions 128

Problems and Applications 129

Part 2: Markets in Action

 

CHAPTER 5: Externalities, Environmental Policy, and Public Goods 130

ECONOMIC INCENTIVES SPUR DUKE ENERGY CORPORATION TO REDUCE POLLUTION 130

Externalities and Efficiency 132

The Effect of Externalities 132

Externalities Can Result in Market Failure 134

What Causes Externalities? 134

Private Solutions to Externalities: The Coase Theorem 135

The Economically Efficient Level of Pollution Reduction 135

Making the Connection 5-1: The Reduction in Infant Mortality Due to the Clean Air Act 136

“Don’t Let This Happen To You!” Remember That It’s the Net Benefit That Counts 138

The Basis for Private Solutions to Externalities 138

Making the Connection 5-2: The Fable of the Bees 140

Do Property Rights Matter? 140

The Problem of Transactions Costs 141

The Coase Theorem 141

Government Solutions to Externalities 141

Solved Problem 5-1: Using a Tax to Deal with a Negative Externality 142

Command and Control versus Tradeable Emissions Allowances 144

Licenses to Pollute? 145

Making the Connection 5-3: Can Tradeable Permits

Reduce Global Warming? 145

Four Categories of Goods 146

Making the Connection 5-4: Should the Government or the Airlines Screen Luggage at Airports? 147

Public Goods and Common Resources 148

The Demand for a Public Good 149

The Optimal Quantity of a Public Good 150

Solved Problem 5-2: Determining the Optimal Level of Public Goods 151

Common Resources 153

Conclusion 155

AN INSIDE LOOK: Two Approaches to Fighting Global Warming: Kyoto Protocol and the Chicago Climate Exchange 156

 

CHAPTER 6: Elasticity: The Responsiveness of Demand and Supply 164

DO PEOPLE CARE ABOUT THE PRICES OF BOOKS? 164

The Price Elasticity of Demand and Its Measurement 166

Measuring the Price Elasticity of Demand 166

Elastic Demand and Inelastic Demand 167

An Example of Computing Price Elasticities 167

The Midpoint Formula 168

Solved Problem 6-1: Calculating the Price Elasticity of Demand for Wheat Using the Midpoint Formula 169

When Demand Curves Intersect, the Flatter Curve Is More Elastic 170

Polar Cases of Perfectly Elastic and Perfectly Inelastic Demand 170

“Don’t Let This Happen To You!” Don’t Confuse Inelastic with Perfectly Inelastic 172

What Determines the Price Elasticity of Demand for a Product? 172

Availability of Close Substitutes 172

Passage of Time 173

Luxuries versus Necessities 173

Definition of the Market 173

Making the Connection 6-1: The Price Elasticity of Demand for Breakfast Cereal 173

Share of the Good in the Consumer’s Budget 174

Is the Demand for Books Perfectly Inelastic? 174

The Relationship between Price Elasticity and Total Revenue 174

Elasticity and Revenue with a Linear Demand Curve 175

Solved Problem 6-2: Price and Revenue Don’t Always Move in the Same Direction 176

Estimating Price Elasticity of Demand 178

Making the Connection 6-2: Determining the Price Elasticity of Demand for DVDs by Market Experiment 178

Other Demand Elasticities 178

Cross-Price Elasticity of Demand 179

Income Elasticity of Demand 180

Making the Connection 6-3: Price Elasticity, Cross-Price Elasticity, and Income Elasticity in the Market for Alcoholic Beverages 180

Using Elasticity to Analyze the Disappearing Family Farm 181

Solved Problem 6-3: Using Price Elasticity to Analyze

the Drug Problem 182

The Price Elasticity of Supply 183

Measuring the Price Elasticity of Supply 183

Determinants of the Price Elasticity of Supply 184

Making The Connection 6-4: Why Are Oil Prices So Unstable? 184

Polar Cases of Perfectly Elastic and Perfectly Inelastic Supply 185

Using Price Elasticity of Supply to Predict Changes in Price 185

Conclusion 187

AN INSIDE LOOK: Do People Care about the Prices of Books on Amazon.com? 190

 

Part 3: Firms in the Domestic and International Economies

CHAPTER 7: Firms, the Stock Market, and Corporate Governance 198

GOOGLE: FROM DORM ROOM TO WALL STREET198

Types of Firms 200

Who Is Liable? Limited and Unlimited Liability 200

Making the Connection 7-1: What’s in a “Name”? Lloyd’s of London Learns about Unlimited Liability the Hard Way 201

Corporations Earn the Majority of Revenue and Profits 202

The Structure of Corporations and the Principal-Agent Problem 202

Corporate Structure and Corporate Governance 202

Solved Problem 7-1: Does the Principal-Agent Problem Also Apply to the Relationship between Managers and Workers? 203

How Firms Raise Funds 204

Sources of External Funds 204

Stock and Bond Markets Provide Capital–and Information 205

“Don’t Let This Happen To You!” When Google Shares Change Hands, Google Doesn’t Get the Money 206

Making the Connection 7-2: Following General Electric’s Stock and Bond Prices in the Financial Pages 207

Using Financial Statements to Evaluate a Corporation 208

Making the Connection 7-3: A Bull in China’s Financial Shop 209

The Income Statement 210

The Balance Sheet 211

Understanding the Business Scandals of 2002 211

Solved Problem 7-2: What Makes a Good Board of Directors? 212

Conclusion 213

AN INSIDE LOOK: Google’s Initial Public Offering 214

CHAPTER 7 APPENDIX: Tools to Analyze Firms’ Financial Information 220

Using Present Value to Make Investment Decisions 220

Solved Problem 7A-1: How to Receive Your Contest Winnings 222

Using Present Value to Calculate Bond Prices 223

Using Present Value to Calculate Stock Prices 223

A Simple Formula for Calculating Stock Prices 224

Going Deeper into Financial Statements 225

Analyzing Income Statements 225

Analyzing Balance Sheets 226

Key Terms 227

Review Questions 227

Problems and Applications 228

 

CHAPTER 8: Comparative Advantage and the Gains from International Trade 230

SUGAR QUOTA DRIVES U.S. CANDY MANUFACTURERS OVERSEAS 230

An Overview of International Trade 232

The Importance of Trade to the U.S. Economy 232

U.S. International Trade in a World Context 233

Making the Connection 8-1: Has Outsourcing Hurt the U.S. Economy? 234

Comparative Advantage: The Basis of All Trade 235

A Brief Review of Comparative Advantage 235

Comparative Advantage in International Trade 235

The Gains from Trade 236

Increasing Consumption through Trade 237

Solved Problem 8-1: The Gains from Trade 238

Why Don’t We See Complete Specialization? 240

Does Anyone Lose as a Result of International Trade? 240

“Don’t Let This Happen To You!” Remember That Trade Creates Both Winners and Losers 241

Where Does Comparative Advantage Come From? 241

Making the Connection 8-2: Why Is Dalton, Georgia, the Carpet-Making Capital of the World? 242

Comparative Advantage Over Time: The Rise and Fall–and Rise–of the U.S. Consumer Electronics Industry 242

Government Policies That Restrict Trade 243

Tariffs 245

Quotas 246

Measuring the Economic Impact of the Sugar Quota 247

Solved Problem 8-2: Measuring the Economic Effect of a Quota 247

The High Cost of Preserving Jobs with Tariffs and Quotas 249

Gains from Unilateral Elimination of Tariffs and Quotas 249

Other Barriers to Trade 250

The Argument over Trade Policies and Globalization 250

Why Do Some People Oppose the World Trade Organization? 250

Making the Connection 8-3: The Unintended Consequences of Banning Goods Made with Child Labor 251

Making the Connection 8-4: Has NAFTA Helped or Hurt the U.S. Economy? 253

Dumping 254

Positive versus Normative Analysis (Once Again) 255

Conclusion 255

AN INSIDE LOOK: The United States and Australia Reduce Trade Barriers 256

CHAPTER 8 APPENDIX: Multinational Firms 263

Multinational Firms 263

A Brief History of Multinational Enterprises 263

Strategic Factors in Moving from Domestic to Foreign Markets 264

Making the Connection 8A-1: Have Multinational Corporations Reduced Employment and Lowered Wages in the United States? 266

Challenges to U.S. Firms in Foreign Markets 267

Competitive Advantages of U.S. Firms 267

Key Terms 268

Review Questions 268

Problems and Applications 268

 

Part 4: Microeconomic Foundations: Consumers and Firms

CHAPTER 9: Consumer Choice and Behavioral Economics 270

CAN LEBRON JAMES GET YOU TO DRINK POWERADE? 270

Utility and Consumer Decision Making 272

The Economic Model of Consumer Behavior in a Nutshell 272

Utility 272

The Principle of Diminishing Marginal Utility 273

The Rule of Equal Marginal Utility per Dollar Spent 273

Solved Problem 9-1: Finding the Optimal Level of Consumption 277

What If the Rule of Equal Marginal Utility per Dollar Does Not Hold? 278

“Don’t Let This Happen To You!” Equalize Marginal Utilities per Dollar 279

The Income Effect and Substitution Effect of a Price Change 280

Where Demand Curves Come From 281

Social Influences on Decision Making 282

The Effects of Celebrity Endorsements 283

Making the Connection 9-1: Why Do Firms Pay Tiger Woods to Endorse Their Products? 283

Network Externalities 283

Does Fairness Matter? 284

Making the Connection 9-2: Professor Krueger Goes to the Super Bowl 287

Behavioral Economics: Do People Make Their Choices Rationally? 287

Ignoring Nonmonetary Opportunity Costs 287

Business Implications of Consumers Ignoring Nonmonetary Opportunity Costs 288

Failing to Ignore Sunk Costs 289

Being Unrealistic about Future Behavior 289

Making the Connection 9-3: Why Don’t Students Study More? 290

Solved Problem 9-2: How Do You Get People to Save More of Their Income? 290

Conclusion 291

AN INSIDE LOOK: Can Whoopi Goldberg Get You to Buy Slim-Fast? 292

CHAPTER 9 APPENDIX: Using Indifference Curves and Budget Lines to Understand Consumer Behavior 298

Consumer Preferences 298

Indifference Curves 298

The Slope of an Indifference Curve 299

Can Indifference Curves Ever Cross? 300

The Budget Constraint 300

Choosing the Optimal Consumption of Pizza and Coke 301

Making the Connection 9A-1: Dell Determines the Optimal Mix of Products 302

How a Price Change Affects Optimal Consumption 303

Solved Problem 9A-1: When Does a Price Change Make a Consumer Better Off? 304

Deriving the Demand Curve 305

The Income Effect and the Substitution Effect of a Price Change 305

How a Change in Income Affects Optimal Consumption 307

The Slope of the Indifference Curve, the Slope of the Budget Line, and the Rule of Equal Marginal Utility per Dollar 307

The Rule of Equal Marginal Utility per Dollar Revisited 309

Key Terms 310

Problems and Applications 310

 

CHAPTER 10: Technology, Production, and Costs 312

SONY USES A COST CURVE TO DETERMINE THE PRICE OF RADIOS 312

Technology: An Economic Definition 314

Making the Connection 10-1: Improving Inventory Control at Wal-Mart 314

The Short Run and the Long Run 315

The Difference between Fixed Costs and Variable Costs 315

Making the Connection 10-2: Fixed Costs in the Publishing Industry 316

Implicit Costs versus Explicit Costs 316

The Production Function 317

A First Look at the Relationship between Production and Cost 318

The Marginal Product of Labor and the Average Product of Labor 319

The Law of Diminishing Returns 319

Graphing Production 320

Making the Connection 10-3: Adam Smith’s Famous Account of the Division of Labor in a Pin Factory 320

The Relationship between Marginal and Average Product 320

An Example of Marginal and Average Values: College Grades 322

The Relationship between Short-Run Production and Short-Run Cost 323

Marginal Cost 323

Why Are the Marginal and Average Cost Curves U-Shaped? 323

Solved Problem 10-1: The Relationship between Marginal Cost and Average Cost 325

Graphing Cost Curves 325

Costs in the Long Run 327

Economies of Scale 327

Long-Run Average Total Cost Curves for Bookstores 327

Solved Problem 10-2: Using Long-Run Average Cost Curves to Understand Business Strategy 329

Making the Connection 10-4: The Colossal River Rouge: Diseconomies of Scale at the Ford Motor Company 331

“Don’t Let This Happen To You!” Don’t Confuse Diminishing Returns with Diseconomies of Scale 332

Conclusion 332

AN INSIDE LOOK: Using Long-Run Average Cost Curves to Analyze Expansion at Sony and Samsung 334

CHAPTER 10 APPENDIX: Using Isoquants and Isocosts to Understand Production and Cost 342

Isoquants 342

An Isoquant Graph 342

The Slope of an Isoquant 342

Isocost Lines 343

Graphing the Isocost Line 343

The Slope and Position of the Isocost Line 343

Choosing the Cost-Minimizing Combination of Capital and Labor 344

Different Input Price Ratios Lead to Different Input Choices 345

Making the Connection 10A-1: The Changing Input Mix in Walt Disney Film Animation 346

Another Look at Cost Minimization 347

Solved Problem 10A-1: Determining the Optimal Combination of Inputs 348

The Expansion Path 349

Key Terms 350

Problems and Applications 350

 

Part 5: Market Structure and Firm Strategy

CHAPTER 11: Firms in Perfectly Competitive Markets 352

PERFECT COMPETITION IN THE MARKET FOR ORGANIC APPLES 352

Perfectly Competitive Markets 355

A Perfectly Competitive Firm Cannot Affect the Market Price 355

The Demand Curve for the Output of a Perfectly Competitive Firm 356

How a Firm Maximizes Profit in a Perfectly Competitive Market 356

Revenue for a Firm in a Perfectly Competitive Market 357

“Don’t Let This Happen To You!” Don’t Confuse the Demand Curve for Farmer Whaples’s Wheat with the Market Demand Curve for Wheat 357

Determining the Profit-Maximizing Level of Output 358

Illustrating Profit or Loss on the Cost Curve Graph 360

Showing a Profit on the Graph 361

Solved Problem 11-1: Determining Profit-Maximizing Price and Quantity 361

Illustrating When a Firm Is Breaking Even or Operating at a Loss 363

“Don’t Let This Happen To You!” Remember That Firms Maximize Total Profit, Not Profit per Unit 364

Making the Connection 11-1: Losing Money in the Medical Screening Industry 365

Deciding Whether to Produce or to Shut Down in the Short Run 366

Making the Connection 11-2: When to Close a Laundry 366

The Supply Curve of the Firm in the Short Run 367

The Market Supply Curve in a Perfectly Competitive Industry 368

“If Everyone Can Do It, You Can’t Make Money At It”– The Entry and Exit of Firms in the Long Run 368

Economic Profit and the Entry or Exit Decision 369

Long-Run Equilibrium in a Perfectly Competitive Market 372

The Long-Run Supply Curve in a Perfectly Competitive Market 372

Increasing-Cost and Decreasing-Cost Industries 374

Perfect Competition and Efficiency 374

Making the Connection 11-3: The Decline of Apple Production in New York State 374

Productive Efficiency 375

Solved Problem 11-2: How Productive Efficiency Benefits Consumers 375

Allocative Efficiency 377

Conclusion 377

AN INSIDE LOOK: Firms Crank Out Organic Snacks 378

 

CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting 386

STARBUCKS: GROWTH THROUGH PRODUCT DIFFERENTIATION 386

Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market 388

The Demand Curve for a Monopolistically Competitive Firm 388

Marginal Revenue for a Firm with a Downward-Sloping Demand Curve 389

How a Monopolistically Competitive Firm Maximizes Profits in the Short Run 391

Solved Problem 12-1: How Not to Maximize Profits 392

What Happens to Profits in the Long Run? 393

How Does Entry of New Firms Affect the Profits of Existing Firms? 393

“Don’t Let This Happen To You!” Don’t Confuse Zero Economic Profit with Zero Accounting Profit 394

Making the Connection 12-1: The Rise and Fall of Apple’s Macintosh Computer 395

Solved Problem 12-2: The Short Run and the Long Run for the Macintosh 396

Is Zero Economic Profit Inevitable in the Long Run? 397

Making the Connection 12-2: Staying One Step Ahead of the Competition: Eugène Schueller and L’Oréal 398

Comparing Perfect Competition and Monopolistic Competition 399

Excess Capacity under Monopolistic Competition 400

Is Monopolistic Competition Inefficient? 400

How Consumers Benefit from Monopolistic Competition 400

Making the Connection 12-3: Abercrombie and Fitch: Can the Product Be Too Differentiated? 400

How Marketing Differentiates Products 401

Brand Management 401

Advertising 401

Defending a Brand Name 402

What Makes a Firm Successful? 403

Conclusion 403

AN INSIDE LOOK: Starbucks and McDonald’s Cater to Insomniacs 404

 

CHAPTER 13: Oligopoly: Firms in Less Competitive Markets 412

COMPETING WITH WAL-MART 412

Oligopoly and Barriers to Entry 414

Barriers to Entry 415

Economies of Scale 415

Ownership of a Key Input 416

Government-Imposed Barriers 416

Using Game Theory to Analyze Oligopoly 417

A Duopoly Game: Price Competition between Two Firms 418

Making the Connection 13-1: A Beautiful Mind: Game Theory Goes to the Movies 419

Firm Behavior and the Prisoners’ Dilemma 419

“Don’t Let This Happen To You!” Don’t Misunderstand Why Each Manager Ends Up Charging a Price of $150 420

Solved Problem 13-1: Is Advertising a Prisoners’ Dilemma for Coca-Cola and Pepsi? 420

Making the Connection 13-2: Is There a Dominant Strategy for Bidding on eBay? 421

Can Firms Escape the Prisoners’ Dilemma? 422

Making the Connection 13-3: American Airlines and Northwest Airlines Fail to Cooperate on a Price Increase 423

Cartels: The Case of OPEC 424

Sequential Games 426

Deterring Entry 426

Solved Problem 13-2: Is Deterring Entry Always a Good Idea? 427

Bargaining 428

The Five Competitive Forces Model 430

Competition from Existing Firms 430

The Threat from New Entrants 430

Competition from Substitute Goods or Services 430

Bargaining Power of Buyers 431

Bargaining Power of Suppliers 431

Making the Connection: Is Southwest’s Business Strategy More Important Than the Structure of the Airline Industry? 431

Conclusion 433

AN INSIDE LOOK: Finding a Market Niche against Wal-Mart 434

 

CHAPTER 14: Monopoly and Antitrust Policy 442

TIME WARNER RULES MANHATTAN 442

Is Any Firm Ever Really a Monopoly? 444

Making the Connection 14-1: Is Xbox a Close Substitute for PlayStation 2? 444

Where Do Monopolies Come From? 445

Entry Blocked by Government Action 445

Making the Connection 14-2: The End of the Christmas Plant Monopoly 446

Control of a Key Resource 447

Making the Connection 14-3: Are Diamond (Profits) Forever? The De Beers Diamond Monopoly 447

Network Externalities 448

Natural Monopoly 449

Solved Problem 14-1: Is the “Proxy Business” a Natural Monopoly? 450

How Does a Monopoly Choose Price and Output? 451

Marginal Revenue Once Again 451

Profit Maximization for a Monopolist 453

Solved Problem 14-2: Finding Profit-Maximizing Price and Output for a Monopolist 454

“Don’t Let This Happen To You!” Don’t Assume That Charging a Higher Price Is Always More Profitable for a Monopolist 455

Does Monopoly Reduce Economic Efficiency? 455

Comparing Monopoly and Perfect Competition 455

Measuring the Efficiency Losses from Monopoly 456

How Large Are the Efficiency Losses Due to Monopoly? 457

Market Power and Technological Change 458

Government Policy toward Monopoly 458

Antitrust Laws and Antitrust Enforcement 460

Mergers: The Trade-off between Market Power and Efficiency 460

The Department of Justice and the Federal Trade Commission Merger Guidelines 461

Making the Connection 14-4: The Antitrust Case against Microsoft 463

Regulating Natural Monopolies 464

Conclusion 465

AN INSIDE LOOK: A “Monopoly Mindset” in the Cable Industry? 466

 

CHAPTER 15: Pricing Strategy 474

GETTING INTO WALT DISNEY WORLD: ONE PRICE DOES NOT FIT ALL 474

Pricing Strategy and the Law of One Price 476

Arbitrage 476

Solved Problem 15-1: Is Arbitrage Just a Rip-off? 477

Why Don’t All Firms Charge the Same Price? 477

Price Discrimination: Charging Different Prices for the Same Product 478

The Requirements for Successful Price Discrimination 478

Solved Problem 15-2: How Dell Computer Uses Price Discrimination to Increase Profits 480

Airlines: The Kings of Price Discrimination 481

Making the Connection 15-1: How Colleges Use Yield Management 482

Perfect Price Discrimination 483

Price Discrimination across Time 484

Can Price Discrimination Be Illegal? 484

Other Pricing Strategies 485

“Don’t Let This Happen To You!” Don’t Confuse Price Discrimination with Other Types of Discrimination 486

Odd Pricing: Why Is the Price $2.99 instead of $3.00? 486

Why Do Firms Use Cost-Plus Pricing? 487

Making the Connection 15-2: Cost-Plus Pricing in the Publishing Industry 487

Pricing with Two-Part Tariffs 488

Conclusion 491

AN INSIDE LOOK: Increasing Business at Walt Disney World 492

 

Part 6: Markets for Factors of Production

CHAPTER 16: The Markets for Labor and Other Factors of Production 498

WHY ARE THE NEW YORK METS PAYING CARLOS BELTRAN A $17 MILLION SALARY? 498

The Demand for Labor 500

The Marginal Revenue Product of Labor 500

Solved Problem 16-1: Hiring Decisions by a Firm That Is a Price Maker 502

Factors That Shift the Labor Demand Curve 503

The Supply of Labor 504

Factors That Shift the Labor Supply Curve 506

Equilibrium in the Labor Market 507

The Effect on Equilibrium Wages of a Shift in Labor Demand 507

Making the Connection 16-1: Will Your Future Income Depend on Which Courses You Take in College? 508

The Effect on Equilibrium Wages of a Shift in Labor Supply 509

Making the Connection 16-2: Why Didn’t the Great Immigration Waves of the Early Twentieth Century Cause Wages to Fall? 510

Explaining Differences in Wages 511

“Don’t Let This Happen To You!” Remember That Prices and Wages Are Determined at the Margin 512

Making the Connection 16-3: Technology and the Earnings of “Superstars” 513

Compensating Differentials 513

Is Job Safety Legislation Good for Workers? 514

Discrimination 514

Solved Problem 16-2: Is “Comparable Worth” Legislation the Answer to Closing the Gap between Men’s and Women’s Pay? 516

Labor Unions 519

Personnel Economics 520

Should Workers’ Pay Depend on How Much They Work or on How Much They Produce? 520

Making the Connection 16-4: Raising Pay, Productivity, and Profits at Safelite AutoGlass 521

Other Considerations in Setting Compensation Schemes 522

The Markets for Capital and Natural Resources 523

The Market for Capital 523

The Market for Natural Resources 523

Monopsony 525

The Marginal Productivity Theory of Income Distribution 525

Conclusion 525

AN INSIDE LOOK: Is a College Football Coach Worth a $1.1 Million Salary? 526

 

Part 7: Information, Taxes, and the Distribution of Income

CHAPTER 17: The Economics of Information 534

STATE FARM EXPERIENCES THE HAZARDS OF SELLING INSURANCE 534

Asymmetric Information 536

Adverse Selection and the Market for “Lemons” 536

Reducing Adverse Selection in the Car Market 537

Asymmetric Information in the Market for Insurance 537

Reducing Adverse Selection in the Insurance Market 538

Making the Connection 17-1: Adverse Selection, Annuities, and Social Security Reform 538

Moral Hazard 539

“Don’t Let This Happen To You!” Don’t Confuse Adverse Selection with Moral Hazard 539

Adverse Selection and Moral Hazard in Financial Markets 540

Reducing Adverse Selection and Moral Hazard in Financial Markets 540

Making the Connection 17-2: Moral Hazard, Big Time: The Accounting Scandals of 2002 541

Adverse Selection and Moral Hazard in Labor Markets 542

Solved Problem 17-1: Changing Workers’ Compensation to Reduce Adverse Selection and Moral Hazard 543

The Winner’s Curse: When Is It Bad to Win an Auction? 543

Making the Connection 17-3: Is There a Winner’s Curse in the Marriage Market? 545

When Does the Winner’s Curse Apply? 545

Solved Problem 17-2: Auctions, Available Information, and the Winner’s Curse 545

Pacific Telesis Uses the Winner’s Curse to Its Own Advantage 546

Making the Connection 17-4: Want to Make Some Money? Try Auctioning a Jar of Coins 547

Conclusion 547

AN INSIDE LOOK: Insurance Companies Wrestle with Asymmetric Information Problems 548

 

CHAPTER 18: The Tax System and the Distribution of Income 554

SHOULD THE GOVERNMENT USE THE TAX SYSTEM TO REDUCE INEQUALITY? 554

The Tax System 556

An Overview of the U.S. Tax System 556

Progressive and Regressive Taxes 557

Making the Connection 18-1: Which Groups Pay the Most in Federal Taxes? 558

Marginal and Average Income Tax Rates 560

The Corporate Income Tax 560

Evaluating Taxes 560

Making the Connection 18-2: Should the United States Shift to a Consumption Tax? 562

Tax Incidence Revisited: The Effect of Price Elasticity on Who Actually Bears the Burden of a Tax 564

“Don’t Let This Happen To You!” Remember Not to Confuse Who Pays the Tax with Who Bears the Burden of the Tax 565

Making the Connection 18-3: Do Corporations Really Bear the Burden of the Federal Corporate Income Tax? 565

Solved Problem 18-1: The Effect of Price Elasticity on the Excess Burden of a Tax 566

The Distribution of Income 567

Measuring the Distribution of Income and Poverty 567

Explaining Income Inequality 568

Showing the Income Distribution with a Lorenz Curve 570

Problems in Measuring Poverty and the Distribution of Income 571

Solved Problem 18-2: Are Many Individuals Stuck in Poverty? 572

Poverty and the Distribution of Income around the World 573

Conclusion 575

AN INSIDE LOOK: Did More Progressive Taxes Make the Distribution of Income More Equal in the United Kingdom? 576

Glossary G-1

Company Index I-1

Subject Index I-3

Credits C-1

Purchase Info

ISBN-10: 0-13-034826-0

ISBN-13: 978-0-13-034826-5

Format: Alternate Binding

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